What is a Transaction at an Undervalue?

What does the Insolvency Act say about Transactions at Undervalue?

A transaction at an undervalue occurs when you sell or transfer a company asset for no cost or a price below market value, leading to insolvency or exacerbating existing insolvency.

 

Understanding Transactions at Undervalue: Investigation Process

If your company is facing financial difficulties and you’re concerned about insolvency, you might think it’s wise to safeguard assets by promptly selling or transferring them.

However, this assumption is risky due to the obligation of company directors to maximise creditor returns when insolvent. The sale or transfer of assets for no consideration, or below their true value, may face scrutiny from an insolvency practitioner if the company undergoes liquidation.

 

Transaction at undervalue- what does it mean by?

A transaction at undervalue involves selling or transferring an asset at a price below its actual value. Such dealings with assets can prompt inquiries from any appointed insolvency practitioner overseeing your insolvency proceedings.

As part of a liquidator’s responsibility, they examine all company transactions, flagging any with potential issues. An administrator or liquidator holds the authority to seek a court order that could reverse the transaction, reinstating the situation as it was before the sale or transfer occurred.

 

What could be involved in a transaction at undervalue?

Typically, looking back up to two years before entering administration or liquidation, an IP may consider the following transactions as undervalue:

• ‘Gifts’ to a connected or third party without payment for the asset.
• Assigning a notably lower value to the asset than if professionally appraised.
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Safeguarding company assets in this manner violates the Insolvency Act 1986. Directors may incur financial penalties and, in severe cases, face criminal prosecution.

 

How are the transactions at an undervalue investigated?

When a company goes into administration or liquidation, it becomes the insolvency practitioner’s duty to examine the conduct of all directors in the period preceding insolvency.

Directors’ actions undergo scrutiny to uncover any instances of unfit conduct or steps that may have diminished creditor returns. Directors are interviewed, and a report is submitted to the Secretary of State, who determines if additional action against a director is warranted.

Formal actions are entrusted to the Insolvency Service, representing the Secretary of State. They hold a two-year experience to initiate court proceedings against any director suspected of unfit conduct.

 

What consequences do directors face for engaging in transactions at an undervalue?

These transactions diminish funds for repaying creditors, contradicting the principles outlined in the Insolvency Act, of 1986. They may be considered as fraudulent or wrongful trading, both bearing severe penalties such as 

• Fines
• Personal liability for company debts
• A criminal conviction.
• Or, disqualification as a director for up to 15 years
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The key message is to reconsider before attempting to safeguard company assets in this manner and to earnestly prioritise the duty of putting creditor interests first.

Directors contemplating the pre-pack administration process may be considering the transfer of assets to a new company. For assets not fully owned by the company, such as those on hire purchase or lease, the complete written consent of the lender is necessary before any transfer or sale to ensure the legitimacy of the transaction.

 

Read More:  

• What Is a County Court Judgment (CCJ) Against a Company
• Bank Account Freezing Orders: Advice for company directors
• My business is making a loss – What are my options
• What is a personal guarantee
• What happens to a Personal Guarantee after bankruptcy

 

Tips to avoid accusations of selling/transferring assets at an undervalue?

Directors must ensure adherence to a formal procedure before selling or transferring assets in such situations. It is advisable to conduct a board meeting where minutes are documented to record all agreed-upon actions in this regard.

This action can offer some protection for individual directors, demonstrating their intent to seek full board approval for the decision.

 

The crucial step is to engage the services of an RICS-qualified surveyor or valuer, ensuring the provision of values for forced sale and going concerned. 

After the sale, ideally at forced sale value, the cash should be promptly deposited, and comprehensive records of the sale must be retained for several years, as mandated by statutory requirements.

If you are uneasy about the sale or transfer of an asset or require guidance amid financial challenges, contact our expert team. We can schedule a same-day consultation at no cost, and with over 100 offices, we offer confidential director support across the UK.